How Financial Institutions Make Money

***Updated this post with “How Financial Institutions Make Money #2″…don’t forget to check it out.***

I’ve never illustrated exactly how banks make money. You’d think most people would understand but the majority of those I meet with don’t. They typically have the basics down but don’t take the whole strategy from point A to point B.

This actually takes me back to philosophy class in college. Remember when you’d create a logical syllogism? You’d make a few claims that work together to prove a conclusion. Here’s a Banking Concept syllogism:

The banking business is very profitable.

Banks succeed by attracting depositors, maintaining use and control of the depositors money for the longest possible time, charge fees and interest on the funds their depositors borrow, and return the money to the depositors as slowly as possible.

Financial tools exist for individuals and businesses to function and succeed exactly like a bank.

Individuals and businesses have a choice to either deposit their money as the depositor at a bank or to deposit their money into the financial tools that allow them to act like a bank.

Therefore, if individuals and/or businesses funneled their money into these specified financial tools then they could profit from their own money and transactions INSTEAD of the bank.

Seems simple. It is. That’s what we teach everyday. Don’t think it’s legitimate? Then why do you see banks on every corner? How could any other business, literally, be successful like banks? Imagine if McDonalds was on each corner of a busy intersection throughout America. Could they really all turn a profit? Of course not…there’s not THAT big of a need. So how can every bank on every corner make a profit? By functioning in the matter described above.

Let’s go a little deeper.

Banks make money differently than you do. They first have to attract money to build their success. Please understand, they produce nothing. They ship nothing. They manufacture nothing. They are completely dependent upon you and others to deposit money. These deposits are the bank’s “raw materials” to operate their business plan.

Let’s imagine that two accounts are opened at the time of your deposit: one for you and one for the bank. The bank is required to keep a small portion of your deposit on hand but is free to use the rest as it sees fit. The primary function of the remaining money is used to loan out to others, maybe even yourself, and earn the interest on those loans.

I like how Don Blanton, author of Circle of Wealth, explains it:

“The homeowner, who pays the builder, who re-deposits the money back into the bank, borrows this money. After receiving the money from the builder, the banker quickly reactivates this process. Once a small portion of these funds has been placed in reserve (as required), the bank loans this money out again. Let’s assume the next loan is for a debt consolidation. Now you should start to see why being the bank is so advantageous!”

He continues, “Let’s continue with the examlple. The money for debt consolidation will eventually be returned to the bank as payments. After keeping the required minimum, the money immediately goes right back into circulation! This time it could be used to provide a customer with a car loan.”

“As the money is again deposited, it could be used for installment credit on a credit card issued by the bank. Can you see the cumulative results of this process? The bank gets one dollar to do the work of several by focusing on multiple uses of your deposits.”

We hear and see advertisements every day of financial institutions telling us to deposit our money. They’ll even give us an iPod or a new sweet toaster oven. They have only two hooks: easy access to money and the opportunity to compound interest. The strategy they themselves employ and the strategy that they want us to employ are very different. They concentrate on deposits that can generate multiple returns while you are invited to leave yours to compound and receive one benefit: interest.

Truly, how many people do you know that have actually gotten ahead financially because of what their money did for them at a bank as opposed to how many banks have gotten ahead financially because of what your simple deposits have done for them?

What if you could redirect your “deposits” into an entity that you own and control and could therefore function just like a bank? Wouldn’t it only make sense that you’d benefit financially in the exact same way as banks do?

Don’t use the bank, be the “Bank” and do what the wealthy have done for ages.

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This entry was posted on Monday, June 22nd, 2009 at 4:55 pm and is filed under Banks, Financial Planners. You can follow any responses to this entry through the RSS 2.0 feed.
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